China: changing the guard

President Hu Jintao’s speech to yesterday’s opening session of the 18th Party Congress will have reassured his supporters that the immanent transfer to power from him to incoming President Xi Jinping will not lead to either a significant shift away from a state led economy, nor to a dilution of the political leadership of the Communist Party. Much of the Western commentary has indicated that Xi will inevitably support change in these areas, for example Angus Walker (ITV News Correspondent in Beijing) in today’s Daily Mirror

The emphasis in Hu’s speech on opposing corruption played well to the Congress delegates, but was also an important indicator that Hu will not allow this to become a partisan issue in the party, his leftist supporters are equally dedicated to rooting out corruption as the rightist supporters of Xi.

It is no secret that Xi was not Hu’s own preference as successor. Xi was chosen in 2007, after a lively debate about inner party democracy, following introduction of competitive elections for the party leadership by the Vietnamese Communist Party earlier that year. An informal poll was conducted among Chinese Communist Party members prior to the 17th Party Congress that led to Xi being selected in preference to Hu’s political ally, Li Keqiang, the Liaoning Party boss.

The outgoing leadership team of President Hu, and Premier Wen Jiabao have delivered a significant shift to the left since Hu succeeded Jiang Zemin as leader of the party in 2002, and President of the People’s Republic in 2003. It is therefore a reasonable question to ask whether the social gains of the Hu era could be under threat, as a new more right wing president takes control.

It is also worth assessing what left and right mean in the modern Chinese context, especially as the divide of the 1980s between reformers (pro-market) and conservatives (wishing to conserve the Maoist command economy) has been superseded by both events, and development of new ideologies.

The reforms of the Deng and Jiang eras had seen the transformation of Chinese society and economy by the introduction of market mechanisms, such as “dual track pricing” that gradually eliminated centrally planned pricing by market values, the introduction of Special Economic Zones (SEZs), and privatisation. Intellectual debate was dominated by the ideas of the “new right”, for example, the reform poster boy and influential economist, Zhang Weiying. Characteristic of this period was the populist six-part television documentary in June 1988, He Shang ( River Elegy) produced by allies of Premier Zhao Ziyang, that effectively called for China to adopt both economic and political liberalism, and learn from the West.

Zhang Weiying, himself praises liberal democracy not to promote political pluralism, but as a mechanism for removing constraints on the freedom of businesses, following Hayekian concepts that the anonymous decisions of the “economically rational man” working selfishly and unconstrained by the state will lead to the greatest social benefit.

President Jiang, the former Shanghai Party boss and Hu’s predecessor until 2002, had invited private entrepreneurs to join the Communist Party and had assembled around himself a kitchen cabinet of reformers who favoured fast economic growth, ditching commitments to equality; and promoting provincial autonomy that allowed the coastal provinces to become rich while the Western interior stagnated; they also reduced state direction of investment and bank lending.

It is important to understand that the New Right are more attracted to economic liberalism than political democracy, and that some of the talk about “reform” lapped up by the Western commentariat is coded to sound like it is advocating greater democratic freedom, but is really more concerned with removing constraints from private corporations. Zhang Weiying, regarded as a reforming liberal, saw his economic ideas promoted by the political authoritarians of Jiang’s get-rich-quick “Shanghai gang”.

There is a persistent problem that Westerners often look at China through a distorting lens; assuming that a brutal Communist Dictatorship is cracking down on pro-democracy demonstrators, and it is taken for granted that Chinese people are demanding a Western-style, consumer-capitalist democracy. Although it was more than 20 years ago, the myths surrounding the (Tiananmen Square) June Fourth movement in 1989 still dominate Western perceptions.

It is therefore worth revisiting how modern China grew out of the economic and social stagnation, and moral and intellectual exhaustion of the Mao era. It is necessary to understand that the political context of the 1980s was one of general disorientation, and far from there being political repression of intellectuals in the 1980s there was at that time a close symbiosis between Communist Party reformers and academia, with reform ideas being sounded out in the universities and then adopted as government policy.

Generally there was an empiricist mindset, expressed by first party secretary, Zhao Ziyang, who said “the river should be crossed one step at a time”, but there was almost no discussion on what was on the other side of the river. The 1980s were also characterised by a flowering renaissance of cultural, literary and artistic creativity, but rather shallow political and social analysis. Indeed, market reforms were being introduced piecemeal in an adventurist way, without being incorporated into an explicit government plan: the aim of a “socialist market economy” was not adopted until the 1992 Fourteenth Congress of the CCP.

Impatience with this state of affairs was growing among many intellectuals, both in Academia and the CCP, with a predisposition to accept the neo-liberal equation between political and economic liberty. But the reform process was on an inherently unstable social trajectory, because political liberalism hit the buffers of the entrenched political interests of the CCP, and indeed was opposed by the widespread ideological acceptance in society that CCP rule is a necessary aspect of maintaining national unity and independence.

At the same time economic liberalism clashed in the 1980s with the perceived economic and social interests of the working class, (and to a much lesser degree the peasantry) who benefitted from the full employment, price regulation and social benefits of the “iron rice bowl”. Though with the benefit of hindsight, perhaps the reforms were better regarded as “creative destruction”, as less productive economic units were replaced by more efficient ones, and working class living standards have improved

The paradox of the (Tiananmen Square) June Fourth movement in 1989 is that it expressed a confluence of two contradictory social protests, of intellectuals wishing for faster and deeper economic liberalisation, and simultaneously by working people reacting against the inflation, inequality and reduced social protection caused by the existing liberalisation.

The consequent repressive crack down in 1989 marked a watershed in Chinese politics. According to the academic, Wang Chaohua, from the UCLA, although immediate priority of the government post 1989 was state security, there was no repetition of the anti-rightist purges that Deng had organised during the 1950s. Intellectual life surprisingly quickly returned to normal, although there has since been a greater disconnect between political leaders and intellectuals.

The intellectual landscape changed markedly in the decade following 1989, partly in response to the repression, but also due to structural societal changes. The emergence of an international Chinese cultural Diaspora, embracing Hong Kong, Taiwan and Singapore, as well as Europe and the USA was reinforced by a number of oppositionists going into either voluntary or forced exile after Tiananmen Square, but was anyway growing hugely due to the expansion of the number of Chinese studying and working abroad; and the growing identification with the success story of the People’s Republic by Chinese residents in other countries. Growing economic ties and investment by the PRC in the economies of Taiwan and Singapore and the recovery of Hong Kong into the PRC, alongside the expansion of Internet and on-line publishing has created a much greater circulation of ideas than ever before possible. China has a vigorous intellectual life, and healthy political debate, with think tanks, academics and experts, as well as researchers in government departments producing competing ideas seeking to influence government. There is a democratic process of debate not dissimilar to that which occurs in liberal democracies in the periods between elections.

For example, the journal, Ershi yi shji (Twenty First Century) published from 1990 onwards relatively free from censorship in Hong Kong provided an early bridge between Diaspora and mainland intellectuals. It had high scholarly standards and reflected the dominant debates among the Intelligentsia, which in the early 1990s included an assault on the political radicalism and egalitarian ideals of the Communist Party by intellectuals like Yu Ying-Shih, Li Zehou and Liu Zaifu. Another debate of this era, initiated by exiles, but that had wide currency in universities in the PRC, bemoaned the lack of a “public sphere” in the terms coined by the German social theorist Jürgen Habermas, which was an obvious but coded attack on the political leadership of the Party. Yu Ying-Shih argued that “political radicalism” (i.e. socialism) was responsible for suppressing a healthy civil society in China.

There was clearly then a trajectory in Chinese society in the 1990s that could have led to the type of cataclysmic transformation that befell the USSR and Comecon countries. Economic liberalisation was being proposed – inside and outside the party – that could have removed all social constraints upon capital, and in a society without a well developed and historical respect for the rule of law, or traditions of power peacefully transferring between parties, political liberalisation would not have provided greater liberty for citizens, it would merely have unleashed the tyranny of the rich to impose their will upon society.

The intellectual counter-attack by the “New Left” probably started with the 1993 publication of a research report by Wang Shaoguang and Hu Angang, then working together at Yale, called “Strengthening the Guiding Function of the Central Government in Transition to a Market Economy”, this reached mainland China a year later via a shortened version in Twenty First Century. This included a number of concerns that would characterise the left’s thinking. They argued that the Chinese state is too weak, and was growing weaker, as “hidden wealth” was being siphoned off by provincial governments and state enterprises, which were out of control and fuelling inflationary consumption and uncoordinated investment sprees. They argued that if this process was not controlled then the state might suffer a Yugoslav style disintegration, with declining legitimacy, and growing class and regional inequality. The left have argued against further liberalisation, and have argued that the state needs to directly intervene to encourage greater equality and promote the interests of the poor. The left advocates slower but more stable growth. Noteably, the left does not in principle oppose market reforms, nor does it advocate Western style liberal democracy.

What is interesting is that according to Wang Choahua, the intelligentsia was almost universally scathing in their response, but the government – even under the rightist leadership of Jiang – responded, and Wang and Hu’s report directly led to the 1994 taxation reforms.

The last 20 years has seen the consolidation of a “new left” both within and without the Communist Party, for example the success of the journal Dushu (Reading), though this also tested the limits of intelectual tolerance, leading to some trouble for its editors. Wang Hui and Huang Ping were sacked as editors in 2008 by the parent company, sdx Publishing. Under their editorship Dushu had controversially hosted a discussion about Che Guevara, and published a paper by neo-Maoist, Mobo Gao, defending the experience of the Great Proletarian Cultural Revolution (GPCR) as perceived by the peasant village, and questioning who controls the current narrative of the GPCR as an unmitigated failure.

Li Changping’s 2002 book Telling the Prime Minister the Truth was a mass best-seller describing his struggle, as a low level party official in Hubei, against corruption and rural poverty, including an exposure of systematic extortion of peasants by party officials. It revealed the weakness of the state, as even when the President and Premier had acknowledged his reports into corruption, the Hubei party machine sought to crush and silence Li. The intellectual climate was therefore increasingly concerned about poverty and inequality, as well as corruption, but was looking to the central state, and the CP, to resolve these problems – the left was seeking an adjustment to the status quo, not its overthrow.

The left and right factions in the Chinese Communist Party are finely balanced, and it is not a “winner takes all system”. Although Hu and Wen are on the left, they have had to move forwards in a collegiate way with a Politburo standing committee that includes both allies and opponents. Mark Leonard in his book “What China Thinks” reports tumultuous clashes in the Politburo in 2004, when Shanghai Party boss, Chen Liangyu, predicted social turmoil if the “Go West” policy diverting wealth to the inland provines from the Eastern Coastal region led to slower growth. Nevetheless, the last decade has certainly seen not only an intellectual strengthening of the left, but also concrete progress.

Hu has also strengthened his position by populist stunts like sleeping in peasant’s houses, and intervening on behalf of unpaid workers; he has also built a leftist power base in the Chinese Communist Youth League.

Both the 11th and 12th Five Year economic plans made in the Hu era have prioritised a broader goal of social development of a harmonious society over economic growth at any cost; thus making a break with the trajectory that has dominated since 1978.

The World Bank report of 2009 evaluated the 11th Five Year Plan as making broad progress, but still failing to sufficiently rebalalnce the economy towards greater consumption

“Significant progress has been made toward several of the major objectives of the 11th 5YP, but important challenges remain,” say David Dollar, the World Bank Country Director for China. Economic growth has far exceeded expectations. Considerable progress has been made toward the 5YP’s most important social objectives: improving basic public services in social protection, education, health, and conditions in rural areas (even though income disparities between rural and urban areas continue to widen). …
“However, China has been less successful in rebalancing its overall pattern of growth, which has limited progress on many key objectives of the 5YP,”says Louis Kuijs, Senior Economist and Task Manager of the Mid-Term Evaluation. There has been little rebalancing away from industry and investment towards services and consumption. This, in turn, has made it difficult to meet the objectives on energy efficiency, the environment, and reducing China’s large external imbalance (the current account surplus). The lack of decisive rebalancing has also made further widening of urban-rural income inequality almost unavoidable, despite strong government efforts.

China still needs to move up the economic food chain in stimulating domestic demand, and moving further away from low wage manufacturing. One of the interesting successes of the Hu era has been the relocating of sunset industries to Africa, with Chinese corporations investing on a commercial basis, and benefitting from lower African wages. This has been a particular win-win outcome because of an increasing pattern of Western disinvestment from Africa, thus benefitting Chinese corporations in hard currency earnings, while also developing an industrial base for the African hosts. China has leveraged from its own experience as a recipient of Japanese development aid to create a distinct model of developmental assistance to Africa (and elsewhere) quite distinct from the Washington consensus. This has prospered even through the global recession, although the high end concept Tianli Special Economic Zone (SEZ) in Mauritius seems to have quietly been dropped after its fanfare launch. One of the advantages of the SEZ model is that it allows the host country to experiment with legal and commercial arrangements in a bubble without having to make the untested change across the whole country.

Given the lack of progress in developing a greater internal market, and service and retail sectors in the 11th plan, the 12th Plan published in 2011, in the middle of a global economics crisis was very bold in making this its primary focus. As Stephen Roache assesses for Morgan Stanley Asia

The 12th Five-Year Plan is far more than an all-encompassing compendium of goals and targets. With the help of forensic analytics, a new set of building blocks and priorities for the modern Chinese economy comes into focus. What emerges is a coherent statement of a very different growth model than the one, which has been in place for the past 30 years. The basic goal is clear: A major shift away from export- and investment-led dynamism toward a new recipe that draws increased support from internal private consumption.

The modern Chinese economy faces a number of major challenges. Firstly, China cannot rely upon export led growth in the face of global recession; there is also an underdeveloped service sector and retail sector:

Distribution is the infrastructure for any consumer society. There is enormous upside for job creation in this area. By way of comparison, only 4% of China’s nonagricultural urban workforce was employed in wholesale and retail trade establishments in 2009. By contrast, in the United States – the quintessential services economy – fully 15% of nonfarm employment is in the wholesale and retail trade sectors.

If, hypothetically, China were to close just half the gap between itself and the United States in terms of the distribution, or trade, share of total employment – namely, taking its current ratio from 4% to 9.5% – it would generate over 5.5 million new urban jobs. That would amount to about 12% of the 45 million new urban jobs it is targeting over the next five years.

Another challenge is the inadequate social safety net. The Hu era has seen a massive extension in terms of numbers entitled to benefits, but the monetary value is still too low. According to recent research published by the International Monetary Fund, the average saving rate for Chinese urban households has essentially doubled in recent years, rising from 15% in the early 1990s to 30% in 2009. This fear driven saving is an impediment on demand growth. Improving old age pensions in particular would generate improved domestic demand.
Overcoming income inequality is also an opportunity for economic growth. The rural economy is still to poor, but as well as addressing this through government action to alleviate poverty, the migration impetus to the towns itself makes those migrating richer. As Roache argues:

With migration shifting between 15 and 20 million citizens a year from impoverished wages in the rural countryside to urban areas where they are making more than three times as much, this transition imparts an enormous windfall to Chinese wage income generation. Moreover, with rural-urban migration expected to total another 310 million over the next 20 years, this trend should provide an enduring tailwind to sustained growth in Chinese labor income.

The Chinese government faced with a precarious market for exports will not do nothing; both its left and right factions are instinctively interventionist; and inaction is also the most risky option.

There is therefore a very interesting convergence of the medium terms objectives of both the left and the right. The right has prioritised economic growth over social justice, but now the left’s objective of improving the living standards of Chinese working people and improving the social wage is itself becoming a key to sustaining economic growth.

President Xi remains an unknown quantity, but the collegiate nature of the Politburo standing committee, and this convergence of interest between the left and right in the party means that there is unlikely to be a dramatic rupture from the policies of the Hu era.

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